Following the Chancellor’s Spring Statement, Peter Glancy, Head of Policy at Scottish Widows, comments:
The impacts of increased costs-of-living on savers and retirees
The big theme from the Spring Statement has been the cost-of-living. Our concern is that this is colliding with a less obvious, but just as serious, savings crisis.
As salaries fall behind prices, disposable income falls and people tighten their belts. As a result, we could be about to see the greatest level of pension saving opt-out rates since automatic enrolment was introduced a decade ago – despite many already not having enough for a comfortable retirement.
For retirees, inflation poses a particular risk, especially those with a Defined Benefit pension or annuity, where annual increases subject to Limited Price Indexation (LPI) can be capped at either 2.5% or 5%. With inflation running at 7.4% for the year, many retirees will see their spending power take a hit.
Financial hardship forces decisions that are tough and sometimes irreversible. Money Helper is a new service from the Government, which provides free financial guidance to those in need. We’d recommend this as a good first point of call for anyone struggling financially.
How pensions can advance UK prosperity
The Chancellor has today pledged to nurture improved conditions for private sector investment into things like tech and R&D, in a bid to “strengthen the economy at home”.
Through the Government’s Productive Finance Initiative (PFI), money held in UK pensions and other investments could in theory play a more active role to achieve this. It has already made reforms to realise this including scheme consolidation, reforms to solvency requirements and the creation of a new investment vehicle, the Long Term Assets Fund (LTAF).
However, investment opportunities must be sufficiently attractive, on a risk adjusted basis, to bring in the money. It’s now well-established that investments which are good for the planet can also be good for your pockets. Is there another virtuous circle here though? Could we invest in ways that both help reduces the cost of living, which is good for our pocket today, and deliver strong returns, which are good for our pocket in the future?
Investing in renewable energy is one such example. If investments in these new sources of energy can provide good return for pension investors while protecting customers from high prices and the volatility of the international energy markets, pension savers could get a tangible financial benefit in the short term, while securing a better long-term future.
Lifetime Allowance remains frozen
We’ve long pointed out that the Lifetime Allowance (LTA) creates a ‘lose-lose’ position for both HM Treasury and pension savers, with less lifetime income for retirees and less lifetime tax revenue for HM Treasury. With inflation now running at close to 8% per annum and the LTA frozen, the real value of pension pots could easily be eroded by a quarter in just three years.
Normally, investment returns counter the effect of inflation. However, when you face a tax penalty of 55% when your investments exceed the LTA, you could actually be fined if your assets keep pace with inflation. This clearly doesn’t make any sense and the Government needs to consider its decision to freeze the LTA.
Annual Allowance remains frozen
The Annual Allowance (AA) is also fixed at £40,000 per annum. While this is not normally an issue for those saving through Defined Contribution (DC) schemes, it has created problems for those in Defined Benefit (DB) Pensions, where we have seen the likes of doctors getting unexpected tax bills when they work overtime. With wages rising in response to inflation, the number of people who could fall foul of these unexpected tax charges could also rise with the AA remaining frozen.